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Page 4 of 9 During the Council budget workshops in April and May 2023, in addition to information on the proposed FY 2023/24 and 2024/25 operating and capital budget and the four-year capital improvement program, the City Council received an update on the City’s projected financial health beyond FY 2024/25. At that time, staff developed and presented two long-range financial forecast scenarios, normal and recession, and both scenarios showed the City facing an ongoing, structural budget gap. In this forecasting, various assumptions must be made in developing any forecast model using the best available information that is neither overly optimistic or pessimistic, and updated as new information becomes available. Below is a summary of assumptions utilized in projecting numbers starting in FY 2025/26 for the baseline scenario. Baseline Scenario In the baseline scenario, revenue assumptions include property tax - the City’s largest revenue source - growing at 3.5 percent annually, sales tax - the second largest revenue source - growing at 2.0 percent annually, Interfund Charges and Recreation Fees growing at 3.0 percent annually, and all other revenues growing at 2.0 percent annually. Expenditure assumptions include personnel costs (the City’s largest expenditure category) growing by approximately 3.3 percent annually. Salary and general benefit cost categories are assumed to increase at 3.0 percent, but the overall increase is greater mostly due to growing pension liabilities through FY 2030/31 based on the projection provided by CalPERS. Non- personnel costs are collectively projected to grow by approximately 2.7 percent annually. Additionally, an annual contribution to capital funds ranges from $3.0 million in FY 2025/26 to $4.5 million in FY 2032/33. An average annual contribution of approximately $5.9 million, in addition to the baseline capital contribution, is also included in the forecast model to fund deferred infrastructure maintenance costs. Combined, these contributions represent a small fraction of the overall deferred infrastructure maintenance needs based on staff’s preliminary infrastructure assessment study from March 2023. Based on these assumptions, the baseline scenario projects an average annual deficit of approximately $13.8 million. Staff is evaluating shortfall reduction measures to reduce the deficit. A first option is to utilize the Section 115 Pension Trust the City established in June 2018. With a balance of $46.3 million as of June 2023, the current proposed plan includes utilizing approximately $6.6 million annually from FY 2025/26 to FY 2031/32. Funds will not be available after FY 2031/32. Staff recently hired a pension actuarial consultant to determine how to best utilize the trust over the next several years, and based on this study’s outcome staff will adjust the forecast accordingly. A second option involves a series of non-personnel budget reductions. Based on preliminary analysis, reductions equivalent to approximately $2.3 million have been included in the forecast. After accounting for these two deficit reduction measures, the baseline forecast scenario shows an average annual deficit of approximately $5.7 million. Economic Slowdown/Recession Scenario In the economic slowdown/recession scenario, revenue assumptions are: growth in property tax revenue is projected to moderate to 3.0 percent in FY 2025/26 and 2.0 percent in FY 2026/27 before rebounding back up to 3.0 percent in FY 2027/28, 3.2 percent in FY 2028/29, and 3.5 percent thereafter starting in FY 2029/30; sales tax is projected to decrease by 5.0 percent in FY 2025/26 and decrease by an additional 2.0 percent in FY 2026/27 before growing again at 2.0 percent annually starting in FY 2027/28. Other taxes, including Transient Page 215 of 228